Callanen International, a wholly owned subsidiary of Timex Corp., is suing Fossil, Inc., the largest U.S. seller of fashion watches, to stop its potential $1.36 billion license agreement with Guess Inc. Callanen has made and distributed Guess watches for 14 years. The lawsuit, filed Aug. 31 in the federal court in Los Angeles, claims the proposed pact violates federal antitrust and state unfair competition laws; “interfered with Callanen’s contractual relationships” with Guess, and would give Fossil a monopoly of the fashion watch market.

It asks the court to bar Fossil from producing Guess watches and to award Callanen triple damages, as authorized by federal antitrust laws. Though unspecified, Callanen’s attorneys claim damages could potentially be “hundreds of millions of dollars.” Officials of Fossil Inc. couldn’t be reached at press time for reaction or comment.. Callanen, based in Norwalk, Conn., currently makes and distributes several designer brands under license, including Versace, Versus, Nautica, Marc Ecko and Guess. Its suit says “a substantial portion” of its business comes from revenues from Guess watches. It had expected to renew the Guess license, which ends Dec. 31, 2006.

Fossil Inc., based in Richardson, Tex., sells watches under its name and under licenses with several others, including DKNY, Burberry, Diesel, Marc Jacobs, Marc by Marc Jacobs, and Emporio Armani. Guess (not a party in the suit) is based in Los Angeles and markets causal apparel; and accessories for men, women and children. Its licensed watch business began two decades ago.

A new 10-year agreement. Fossil and Guess announced Aug. 26 they were in “advanced negotiations” for a 10-year global license agreement. Fossil would make and distribute Guess and Guess Collection watches, starting in January 2007. Kosta Kartsotis, Fossil’s president and CEO, expected the agreement to be finalized by early September. The pact calls for Fossil to form a separate company for the Guess business and use Fossil’s international network to expand distribution of Guess and Guess Collection watches globally. Currently, worldwide wholesale sales of Guess and Guess Collection watches total about $150 million. Fossil and Guess believe they can push that to $1.36 billion in the first 10 years.

“We are very excited about this proposed partnership with Guess,” stated Kartsotis. It is a “a unique global brand and positioned for substantial long-term growth throughout the world.”

Since inception of the licensed Guess watch business 21 years ago, said Paul Marciano, co-chairman and co-chief executive officer of Guess? Inc ., “we have been closely involved in product development” with Callanen, which he thanked for its “contributions to the growth of the Guess watch business.” Now, he said, “we plan to continue to be very involved with Fossil.” Marciano expected the new partnership to be “a strong one and contribute to the further expansion of the business both domestically and internationally.”

Callanen’s allegations. Callanen’s lawsuit says it has had an exclusive worldwide license since 1991 to make and sell Guess fashion watches; has made “substantial investment” in them worldwide (including distribution, advertising and promotion) and had “a reasonable expectation” the license would be renewed. One reason, it says, is a June 6 fax from Marciano to Joe Santana, chairman of Callanen (and Timex) calling Callanen “a very strong partner.” However, on Aug. 23, Marciano wrote Santa that Guess decided not to renew its license with Callanen.

The suit charges Fossil with allegedly interfering with Callanen’s contractual relationships; contends Fossil “improperly induced” Guess to disclose confidential information about Callanen and used that in negotiations with Guess for its license. “Despite the ongoing contractual relationship between Callanen and Guess,” it contends, “Fossil sought to acquire the Guess license for itself and thwart [their] efforts to reach agreement on a new license.” It claims it sought to “disrupt Callanen’s ongoing fashion watch business,” in part by the public announcement of its negotiations with Guess, allegedly interfered with Callanen’s distributors and allegedly made “false and disparaging statements” about the ownership of Callanen.

The complaint contends that Fossil Inc.’s share of the U.S. fashion watch market (about 40%), would grow to 60% under what it calls the “illegal” agreement. That would enable it to “monopolize the market for fashion watches by significantly eliminating effective competition, controlling prices and preventing entry or expansion into that market.” The result, it claims, would be “higher prices and lower quality.”

Callanen’s lawsuit accuses Fossil of federal antitrust violations under Section 1 of the Sherman Act (unreasonable restraint of trade), Section 2 of the Sherman Act (attempt to monopolize the fashion watch market), and Section 7 of the Clayton Act (acquisition that will substantially lessen competition). It asks the court for permanent injunctions barring Fossil from making and distributing watches under license from Guess and for tripled damages sufficient to compensate Callanen for “all direct, special and other damages.”